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With job growth continuing to lag even as the economy picks up, local communities will be tempted to resume “smokestack chasing”—using tax breaks to attract big employers. That’s a misguided approach.

Our research shows that regional economic growth is highly correlated with the presence of many small, entrepreneurial employers—not a few big ones. In fact, a study of U.S. metro regions showed that cities whose number of “firms per worker” was 10% higher than the average in 1977 experienced 9% faster employment growth between 1977 and 2000.

More Small Firms Means More Jobs

Cities relying on only a few large firms for employment experienced slower subsequent job growth than cities with an abundance of small firms.

Data can be misleading, of course, so it’s reasonable to wonder whether industry structure, tax policy, or some other special circumstance skewed the results. The answer is no: Even adjusting for such variables, the relationship between small firms and job-growth rate stands.

For example, in a project with Giacomo Ponzetto of Barcelona’s Pompeu Fabra University, we analyzed “city-industry clusters,” which allowed us to adjust for the effects of each city’s and industry’s overall growth rate, among other things. We found that industries with smaller firms and more start-ups enjoyed faster employment growth than other industries in the same city and than the same industry in other cities.

Politicians enjoy announcing a big company’s arrival because people tend to think that will mean lots of job openings. But in a rapidly evolving economy, politicians are all too likely to guess wrong about which industries are worth attracting. What’s more, large corporations often generate little employment growth even if they are doing well. Automakers, for instance, often source parts and other inputs from their internal networks, which limits employment spillover effects. Or a firm may fill staffing needs by transferring employees. Instead of trying to buy their way out of the recession with one big break to one big employer, politicians should reduce costs for start-up companies and small businesses.

And a little work in that direction goes a long way. Research shows that once entrepreneurship gets established, it tends to be self-perpetuating.

A version of this article appeared in the July–August 2010 issue of Harvard Business Review.

Edward L. Glaeser is the Fred and Eleanor Glimp Professor of Economics at Harvard.

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